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November 11, 2011

Top 10 Terrible Predictions About Economy

On 11/11/11, while the world still exists despite some predictions otherwise, a review of some terrible predictions about the markets and the economy

These jobless New Yorkers in the 1930s probably thought Irving Fisher's 1929 prediction was a bit off. (Photo: AP)

Making predictions is a time-honored American tradition. Being right can make a career (see Meredith Whitney’s warning on bank stocks in 2007), but being wrong can bring scorn (see Meredith Whitney on a muni bond collapse in 2010).

Financial professionals, politicians and members of the media have provided plenty of examples of prognostications gone wrong over the years. From the Great Depression (Irving Fisher) to the auto business (Business Week magazine) to the state of the mortgage industry (Rep. Barney Frank), there is no shortage of examples.

Here, then, is AdvisorOne’s list of the Top 10 Terrible Predictions About Economy.

10. RAVI BATRA, 1987 Book: “The Great Depression of 1990”

An economics professor at Southern Methodist University who churns out best-selling books, Ravi Batra is known for his predictions. Some have been close to the mark, like those made in the early 1980s that foresaw low inflation, cheap oil and a spate of mergers later in that decade. Others, like the spectacular failure in the title of his 1987 book, have left much to be desired. The New York Times reported that 40 publishers rejected that book. Maybe it should have been 41.

9. ALAN GREENSPAN, 2005Touted derivatives as risk free

Alan Greenspan was the head of the Fed for nearly two decades. When he appeared before Congress to testify on the state of the economy, his vague answers were studied and interpreted by the economists, the media and financial professionals. A mistimed cough could move markets. Maybe more attention should have been paid to statements like this one Greenspan made in 2005, in which he saw no risks in derivatives, the financial instruments that helped topple the economy in 2008:

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions ... Derivatives have permitted the unbundling of financial risks.”

Of all the arcane products developed by the financial services industry, credit default swaps might be the most complicated.

Why, even Cassano claimed it was all the auditors' fault when things went south for AIG, the largest insurance company in the U.S., leading to a $182 billion taxpayer bailout in 2008. It made Cassano’s 2007 statement seem quaint:

"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions."

A scant year later no imagination was necessary. The problem was all too real.

7. PRESIDENT GEORGE H.W. BUSH, 1988“Read my lips, no new taxes.”

The first President Bush was firmly part of the “Reagan Revolution.” The anti-tax fervor of the country could not be ignored by any politician, and certainly not the vice president to the “Great Communicator” himself.

So what else was a candidate to do at the 1988 GOP convention? Bush’s pledge drove the party faithful wild and helped him get elected.

Alas, a sinking economy and his backing of tax increases doomed his presidency to a single term as Bill Clinton used the vow against him.

He probably wished there weren't any lip readers.

6. JAMES GLASSMAN and KEVIN HASSETT, 1999 Book: “Dow 36,000”

In 1999, the future of the U.S. economy looked bright. The Dow was soaring and even a prediction of it reaching 36,000 didn’t seem totally crazy.

It turns out it was. A little bump in the road called the dot.com bubble slowed the market. And Glassman has written since that the world economy and the U.S. had changed, rendering his prediction obsolete. Oh well, that has stopped the executive director of the George W. Bush Institute from writing books advising a new generation of investors to be cautious.

As for Hassett, he continued making predictions, including another failed prognostication in 2008:

"The Federal Reserve and Congress have delivered a ton of economic stimulus, and that stimulus is set to juice up an economy that has been weak, but not terrible. If everything goes according to plan, the economy will grow faster in the second half of the year, and a recession will have been avoided."

Whitney made her fortune picking stocks as an executive at Oppenheimer & Co. and then running her own eponymous firm. She earned a soapbox on CNBC among other cable networks and bolstered her stature with an early warning on bank stocks in 2007, long before the financial meltdown proved her right.

But Whitney pressed her luck in the prediction department a year ago when she declared that the municipal bond market was ready for a fall--a big fall. As in splat, with “50 to 100” big defaults possible.

Critics howled. “60 Minutes” put her in the spotlight in December. Then she ducked Congress when it wanted her to testify. Meanwhile, muni bonds have been hanging in there--but she does have nearly two months left for her prediction to come true.

Barney Frank is known for his liberal politics, his openness on being gay and his quick wit, once saying he couldn’t finish the report on the Monica Lewinsky scandal “because there was too much heterosexual sex” in it. He has backed many civil rights causes, including reparations for the victims of Japanese American internment during World War II.

He was outspoken in his disdain for the financial industry and put his name and political muscle as chairman of the House Financial Services Committee behind the Dodd-Frank Act to tighten the regulations on the industry. Some say he's way too liberal and say some he's not, but all would likely say Frank was wrong when on July 14, 2008, he said:

"I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They're not in danger of going under … I think they are in good shape going forward."

By September of that year, both mortgage institutions were in dire straits and placed in conservatorship of the U.S. government, and continue to suck up billions in bailout dollars.

3. BEN BERNANKE, 2008Played down danger of bank failures

In early 2008, the Fed chief told Congress that there might be some trouble in the banking industry, but it wouldn’t be too bad:

"I expect there will be some failures. … I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

Well, things got a little bit worse than Big Ben expected. You might remember there were a couple stories in the news about it. In September 2008, Washington Mutual collapsed and Citigroup followed in November.

2. BUSINESS WEEK magazine, Aug. 2, 1968 Japanese autos no threat to U.S. manufacturers

Detroit was riding high in the 1960s. Everyone knew U.S. automakers made the best cars. Sure, Japanese cars were starting to find their way to California, but no worries, right? Business Week captured the mindset of executives at Ford, GM and Chrysler:

“With over 15 types of foreign cars already on sale here, the Japanese auto industry isn't likely to carve out a big share of the market for itself.”

By the 1980s, the prediction was long proved false. The U.S. automakers were facing a serious assault from Toyota, Honda and others.

The higher costs and inferior products of U.S. auto makers helped the Japanese manufacturers continue their ascent. Finally, the American carmakers started to get their act together, delivering better cars and, ironically, using the sinking economy to win givebacks from unions and help from the government. Only Ford managed to come back without taxpayer help.

1. IRVING FISHER, economist, 1929Predicted stock market had hit permanently high level just before the crash

Fisher was a well-known economist of the early 20th century working from Yale, where he taught. He was credited with a few theories—the Fisher equation and debt deflation among them—and he was known for his social activism, including arguing in favor of racial segregation as a member of the American Eugenics Society.

No less an economist than Milton Friedman called Fisher the “greatest economist” the country had ever produced. But the Great Depression was his undoing in the public consciousness.

Three days before the Oct. 29 market crash, Fisher uttered the words that would come to haunt him: "Stock prices have reached what looks like a permanently high plateau."

Fisher stood by his belief in the market for more than two months and the damage to his reputation was done.

He did manage to develop his debt deflation theory, which postulated that a credit bubble was to blame for the Great Depression. Rejected in favor of Keynes at the time, the idea was revived in the last three decades. Better late than never.

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